Asia’s post-pandemic growth and inflation outlook

Jonathan Tiu September 30, 2021 09:29

As we head towards the end of another turbulent year, we can see that global economies have seen rebound from what we hope is the worst of the pandemic. We have seen strong growth in the financial markets, and negative output gaps have closed, especially in the United States. Is this as good as it gets?

The worry is that not only have we seen the peak in growth but also that growth going forward will be weaker than expected. Also, there is concern that inflation will balloon to levels much higher than anticipated. And on top of that, there is the uncertainty brought about by the Delta variant.

For Asian investors to understand how best to achieve their long-term investment goals, it is important to recognise how the region’s economies are dealing with an easing pandemic landscape. From there, we can cut through the uncertainty and temper expectations for the road ahead.

Growth and inflation outlook for Asia

In Asia, some leading economies are exhibiting a combination of robust recovery-related internal demand and strong exports, while others continue to battle pandemic-related hurdles.

In Singapore, for example, the Ministry of Trade and Industry (MTI) recently upgraded its GDP growth forecast to 6-7%, up from the previously predicted forecast of 4% to 6% in May. Against a backdrop of high vaccination levels, easing border restrictions and a rebound in global demand of outward-oriented sectors such as manufacturing and wholesale trade, Singapore is aiming for a gradual recovery in the second half of this year.

Other economies in the region, such as South Korea and Australia, have also demonstrated evidence of a rebound, driven by strong demand for electronics exports and iron ore exports, respectively.

In contrast, there is a much more subdued outlook for many emerging economies, such as Malaysia, Indonesia and Thailand, which remain weighed down by low vaccination rates and the tightening of restrictions aimed at containing surging COVID-19 cases.

These mixed outlooks remain similarly weighed down, however, by remaining downside risks to the global economy, delta uncertainty, upside risks to inflation and geopolitical instability.

The stimulus-induced increase in house prices and household leverage is also a complicating factor for the growth and inflation outlook, given the range of possible policy responses. For example, in South Korea, these financial stability risks underpin the commencement of its monetary policy tightening cycle, whilst in New Zealand less traditional responses are underway, such as government regulation and macroprudential lending restrictions.

For now, the existing uncertain environment is helping to keep inflationary pressures on downstream consumer prices in check, despite some large increases in upstream producer prices. In Singapore, core inflation — which excludes private transport and accommodation costs — eased to 0.6% in June 2021, down from 0.8% in May, due mainly to a decline in the cost of retail and other goods.

In Asia, we are also starting to see this downward inflationary pressure materialise in the form of policy divergence. China recently embarked on new monetary policy easing, with a reduction in its reserve requirement ratio. By contrast, expectations are for New Zealand's central bank to tighten monetary policy later this year via policy rate hikes, given concerns over the risk of a wage-price spiral amidst international border restrictions.

Despite evidence of inflation remaining relatively steady in the region, unease is still widespread. Forty-seven percent of Asian investors surveyed in the recent MFS Compass Survey, conducted by an independent third-party market research provider among institutional investors in North America, Europe and the Asia-Pacific region, expressed concerns over rising inflation. By comparison, only 39% of those in the US marked inflation as their top concern.

This level of concern is not unwarranted, especially considering that the risk of inflation rises when you have a positive output gap and industry capacity utilisation is very high — the direction we are headed in. If we do not see better growth, especially nominal growth, in this next business cycle, then we will eventually need to service an ever-growing mountain of fiscal debt from an even weaker position.

Planning for the long term

Despite this uncertainty, the MFS Compass Survey found that 67% of investors surveyed in Asia (excluding Japan) are optimistic about the economy as the region emerges from the pandemic. However, optimism over an economic rebound does not necessarily translate into confidence in achieving investment objectives. The survey found that only one-third of investors have confidence in achieving their short-term investment objectives and just 36% are confident about achieving their long-term ones post-pandemic.

While there has been an overall recovery in spending as pent-up demand has been released, the global disruptions across industries, markets and regions stemming from the pandemic have left investors uncertain about the future. This sentiment against a fluctuating inflationary outlook demonstrates that a renewed focus on long-term, fundamental investing will be key to addressing uncertainty at both the industry and individual security level post-pandemic.

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Jonathan Tiu

Singapore CEO, MFS Investment Management